Financial institutions shouldn’t be required to measure risk against a benchmark portfolio because it makes no sense, said Richard Bove, an analyst at Rochdale Securities LLC, in reaction to comments from Citigroup Inc. (C) Chief Executive Officer Vikram Pandit.
“We do have risk-weighted assets indicated every quarter, we do have capital indicated, we do have a lot of the things Pandit is asking for,” Bove said today in a radio interview with Tom Keene and Ken Prewitt on “Bloomberg Surveillance.” “But this desire for uniformity in a business which is supposed to be driven by risk, in my view, makes no sense. I simply don’t believe it could be done.”
A new way to measure risk is needed to “compare apples with apples,” Pandit wrote in an op-ed article published yesterday by the Financial Times. Regulators need to create a portfolio of real investments that represent what financial firms hold and require companies to measure risk against it to create a “common frame of reference” and encourage firms to take a conservative approach to risk, wrote the head of the third-biggest U.S. bank by assets.
“What he’s driving for is a uniform system that would constrain everyone who’s in the financial market,” Bove said. “He wants a whole new layer of accounting to be put on top of the accounting that is already in the industry, and the accounting in the industry right now is among the worst anywhere in the world.”
Regulators are moving the industry toward a “planned financial system,” and it needs to be returned to a “free- market situation where these banks are able to go where they think is appropriate, and if they make bad loans, they’re going to go out of business,” Bove said.
‘We’ve Accomplished Nothing’
The Dodd-Frank Act financial overhaul is forcing business out of the banking system and into the “shadow-banking system,” contributing to the formation of unregulated activity, Bove said.
“We’ve done nothing, we’ve accomplished nothing,” Bove said. “I think what Pandit would like to see is a uniform system that affects all companies that are in the financial sector, which I don’t believe should be done at all.”